The New Normal
In my last article I wrote about the pros and cons of about managing your own planning and investment strategy. I was aiming to return to the theme of inheritance tax planning and to share a number of ideas that would stimulate food for thought. What a difference a few months can make!
Whilst the need for estate planning remains a central concern, the even larger one now is to survive the pandemic. The two are not mutually exclusive of course! In early February I watched the news like you. I was therefore aware of the situation in Wuhan and also of the covid 19 cases in Italy. But, like Donald Trump, I underestimated the potential impact on the rest of the world. In the meantime we have, in the UK, become European champions of the pandemic in terms of fatalities.
You might argue I should have perhaps have heard the footsteps of the pandemic approaching and that I should have told you that it would be a good time to sell your investments. In the US a number of government officials who had access to secret briefings seem to have done just this…allegedly.
As I’ve explained in the past though, the role of a financial planner isn’t to tell you when to sell and when to buy shares. Planning involves maximising tax-saving opportunities and making sure you have the right amount of money available at the right time.
Most people are moderate risk investors. If you are in this category, it means you accept that there will be some volatility. So if you look at rolling index returns for the FTSE 100, it isn’t unusual to see double digit swings over 12 month periods. It is rarer to see negative figures over 5 years, and over ten years even more so, especially with dividends reinvested. You understand this and are therefore willing to accept risk provided it is carefully managed. In addition fund managers with a moderate risk mandate do this typically by limiting exposure to equities to say 50% and balancing them with holdings in government bonds and other similar lower volatility assets. The equities provide growth potential, whilst the non-equity assets provide stability when there are market corrections. It has to be said at the same time that we are heading into uncharted territory and if the depression ahead is as severe as looks likely, the recovery time for equities could run into decades. Nothing can therefore be taken for granted.
So in the case of our moderate risk clients, yes there has of course been a drop in portfolio values but since the agreed planning timescale is five years or more, there is no need for panic. A loss only becomes a loss when you sell and our advice is to stick with the program. Looking back over the past 24 months all of our portfolios are in fact not only positive but have provided returns of more than that of cash on deposit.
But cash will invariably form a significant part of your wealth, or ought to. The pandemic, as we have seen, does carry with it some very serious consequences, with a global recession and mass unemployment having a severely denting effect on the global economy. The impact is going to be apocalyptic and its full extent is still being assessed, with the idea of a second depression gaining currency. It may then be worth reviewing how well your cash assets are protected, particularly given the cost of previous government bail-outs.
In the event of your bank, or other UK financial institution failing, as a number did in 2008, you are now covered by the Financial Services Compensation Scheme up to a maximum of £85,000. You might with this in mind want to look carefully at your cash deposits and ask yourself whether it might be more prudent to prune your bank accounts and spread them across a number of banks and building societies. You would then benefit from a higher level of protection across the board. Agreed this is a nuisance administratively but not taking such steps might bring greater inconvenience.
The consequences could be graver if you are a trustee and you are responsible for managing funds on behalf of others. Here there is even greater reason to ensure that money is protected by the FSCS and that there is no more than £85,000 deposited with a single bank. Here you have a legal obligation to act prudently after all.
There is no end in sight regarding the pandemic and if the Spanish Flu of 1918 is anything to go by, there is a likelihood of further waves. The “Stay Alert!” message of Boris’s speech of 10th May is also the name of the game when manging your money. With interest rates at rock-bottom you are almost paying your bank to look after your money. Being willing to accept a measured amount of risk means that although there is no guarantee in 12 months your investment will be worth more than it is now, over a 5 year period it is statistically likely you’ll do better with a managed risk approach than leaving cash on deposit. The important thing is to ensure money you are going to need to call on in the meantime is as protected as it can be but it is equally important that you don’t leave the rest to stagnate.
In times like these we are keenly aware that our health is paramount. This sudden coming face to face with mortality also gives us an opportunity however. What is important to us no doubt looks different now to how it did a year ago. We can use this moment to reflect on the bigger picture and to say the things we always meant to say and do the things we always meant to do.
So far we have sadly lost one client to covid 19 but mercifully all of our Barbican friends and clients are weathering the storm well and are in good health. Long may this continue!
Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.